Raghuram Rajan, former RBI Governor and former Chief Economic Advisor, spoke to The Indian Express’s Udit Misra about a wide variety of topics ranging from inflation to GDP growth to the impact of possible global trade war under President-elect Donald Trump’s second term. Edited Excerpts.
A: I think the reason that we targeted headline inflation (CPI) rather than core CPI (inflation without food and fuel prices), is because food is such a big part of the Indian consumption basket; to ignore it is to ignore one of the biggest components of inflation. So you may say, as RBI says, core inflation is coming down, but if your food inflation is high, people are hurting and they’re saying, “What world are you living in? You don’t see the fact that we are hurting”.
Q: What can the government do, or could have done, to contain inflation?
A: That is the real challenge that we have, right?
If you look at our GDP level relative to what it would be if we had grown at 6% steadily through the pandemic, we are about 6% below one year of growth. Below that one year means a lot of jobs (lost).
But also, what is important is our economy itself is not creating enough jobs. Manufacturing, for example, is becoming much more capital intensive over time. Where we are creating jobs is in construction and agriculture. Construction, of course, because of the boom in infrastructure spending, etc, is understandable. Agriculture is worrisome. Why are people going back to agriculture when, in fact, in every developing country, they should be coming out into the services and manufacturing.
Services was creating jobs, but through the pandemic, it has not.
I think the big question for the government has to be: How do we create more jobs and higher quality jobs?
Q: Just before Covid hit, India’s growth rate was less than 4% and there was a secular deceleration that was happening over the three years preceding Covid. Why did we have this massive jump for three straight years?
A: Well, recoveries are not immediate, right? So remember, there were a few quarters of really negative growth, strongly negative growth during the pandemic. So the sort of spring back, the recovery has boosted growth over two or three years. Now, I thought where you were going is: Is our real rate of growth the 2019 rate (4%) or 6%?
The 4% growth rate would be terrible if we go back to that. My hope is that we may have another quarter of low growth, but we go back eventually to six. But even with six, you know, it’s not enough.
Q: For an economy like India where even a 4% GDP growth rate looks like a stagnant economy. And while it is not exactly stagflation at present, is India facing something similar to a stagflationary scenario?
A: Oh, 4% is deep recession from our perspective…I think if we go down to four, we are in a terrible situation. Remember, we are in the sweet spot that every East Asian economy was when it got a population dividend: A lot of young people coming into the labour force, and reducing the dependency rate — that is, the old and the very young who cannot work. So our working population — working-age population as a fraction of the population — is growing. This is when our growth should, even relative to the recent past, go up by a percentage point or two if we create the jobs for the people coming into the workforce. The fact that we’re not growing faster now is really worrisome, right? In other words, I keep saying 6% won’t cut it, but it should be more than 6% just from the population dividend. It should be even more for us to achieve that goal of “viksit desh” by 2047 and if it’s business as usual, it’s not going to happen.
The problem right now is some of our state governments are spending so much on this, there’s not enough to invest in really improving the capabilities of our population, the former RBI Governor said. (Express photo by Chitral Khambhati)
Q: How do you see the trend of all political parties promising government dole? Does it mean Indian politicians have sort of given up on solving for unemployment?
A: Well, I think there’s a competitive political process to give out doles. Some transfers are not bad if they are targeted at the poor because that gives them some ability.
But if you give out so much in dole that you cannot make infrastructure investments, that you cannot invest in public provision of services, better schools, better healthcare, for example, rural roads — those are things we need far more of if we are to grow.
The problem right now is some of our state governments are spending so much on this, there’s not enough to invest in really improving the capabilities of our population, and ultimately we will live or die on the basis of how much we invest in our people. Today, manufacturing cannot really, if it’s globally competitive, employ unskilled workers. It uses machines. What it needs is workers who can take care of the machines. That requires a level of skills. Similarly, services too.
Q: Many leaders are now urging Indians to have more children either to boost economic growth or for political reasons. How do you view these calls?
A: So the reality is that in some states the fertility rate has fallen below the replacement rate. The reality is that we are a country with a very mixed sort of economic experience. The north isn’t doing as well as the west and the south in terms of per capita incomes.
What would be nice is if instead we encourage more (internal) migration. Because truly, when do countries stay young even when they grow rich — a country like the US — because a lot of immigration has taken place. In our country, we can have internal migration which takes care of the problem.
Q: Should India cut GST rates to boost consumer demand?
A: If you constantly cut and raise GST rates, then people don’t have an ability to plan. And then you have the whole lot of lobbying, cut my rate, keep his rate high, etc. I would say, keep, work on normalizing the GST rates over time. But offer some predictability.
Q: The Union Budget will be presented in a month’s time. What should be the focus of the budget under the circumstances?
A: I think as a country, we need to ask, what is our path for growth. Almost surely low-skilled manufacturing exports, which was the way for other countries in South Asia — eg China — grew, is much harder today. One, because of the protectionism you see. Two, because it’s increasingly automated and doesn’t create as many jobs. And three, because you know of automation, etc. China will be in it for a much longer time, as will Vietnam, etc. We’re not competing against the US. We are competing against these guys. We need to think, what is our comparative advantage? If you look at the last export numbers, where are we really doing? Well, high skill services. So can we start thinking about multiplying the number of people who can do that.
Q: With Donald Trump set to become the US President, do you expect a global trade war and how might that impact a country like India which has been struggling to grow its exports?
A: Fortunately for us, the trade war, if it happens, is going to be concentrated on manufacturing. Doesn’t mean services is immune, but it’s going to be focused on manufacturing.
It is also going to be focused on deficits that America has with the rest of the world. And it runs a pretty big deficit with India, not the biggest — Mexico and China come before India— but 60 billion is not to be sneezed at either.
But also, even if India is not tariffed, and the special relationship between President Trump and Prime Minister Modi holds, there’s still the issue of Chinese goods not finding a home in the US or through surrogates in Vietnam and Mexico to the US, now being forced to flood the rest of the world.
And so we have to think of second order effects.
Q: Rupee’s exchange rate has become a very emotive issue. How will it be impacted?
A: I think we should sort of try and diminish the visibility of the rupee in the public mind because that tends to make us focus too much on keeping a strong rupee.
I think the right thing to do is to focus on keeping inflation moderate and contained, and the rupee will take care of itself. It is when you have lost the plot on inflation that the rupee does all sorts of weird movements.
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